Entrepreneurship and Starting a Small Business

Chapter 5

Entrepreneurship and starting a small business

Introduction to entrepreneurship:

• Entrepreneurship is a great way to apply your business skills to making a business out of a hobby, or out of a passion or some special skill a person possess.
• Entrepreneurship needs – commitment and proper preparation to be able start your business.

What does it take to be an entrepreneur?

• Entrepreneurship possess a huge power in the creation of jobs in the economy.
• Some entrepreneurships grow to become millionaires,

E.g – amazon.com

Google

Codak …etc

But there are other entrepreneurs who are not millionaires but are very successful financially and offer important contributions to the communities and the people who are employed by them.

• Whether the entrepreneur goal is to become a conglomerate or keep the business small and personal  there are common characteristics that all successful entrepreneurs have a commons:

1. Self- directed:

-Should be the thoroughly comfortable with the business.

-Should be self-disciplined, as he/she is their own boss.

1. Self- nurturing:

-Must believe in your ideas  even when no one else does.

-Must be able to replenish your own enthusiasm.

1. Action- oriented:

-To have the idea by itself is not enough, a person must have a burning desire to:

Realize.

Actualize.

And build his dream into reality.

1. Highly energetic:

-A person must be emotionally, mentally, physically able to work long and hard as its own business.

1. Tolerant of uncertainty:

-Successful entrepreneurs take only calculated risks, but the must be able to make some big risks sometimes.

-So people with high need for security can not become entrepreneurs.

Most entrepreneurs use the flashlight approach to get innovations  i.e. they would search every where for new ideas, and once they find an idea they would immediately a doubt it in the business.

Even small businesses can use this flashlight approach, to continue improving upon their businesses.

Even though opening your own business could be risky, still many people do it for following reasons:

1. Opportunity:
2. Many people may not have the skills necessary for working in today’s complex organizing  however, they may have the initiatives and drive to work the long hours demanded by entrepreneurship.
3. Its an opportunity for people who are also gone without a job ( become of downsizing ), and for people who are disability.

1. Profit:
2. All the profits realized or made is the entrepreneurs own profits, not shared with anyone else.

1. Independence:
2. Many people do not enjoy working for someone else, they like to enjoy their independence.

1. Challenge:
2. Some people believe that entrepreneurs are excitement junkies who flourish on taking risk.

-But overall entrepreneurs take moderate, calculated risk, they are not just gambling.

-In general entrepreneurs seek achievement more than power.

It was found that 56% of new entrepreneurship businesses would fail in the first four years.

That is why when you start your own business, it’s very important to choose the correct form of ownership, which will help you incurs fewer personal losses if your business does not succeed.

1. Sole proprietorships:

it is the easiest kind of business to start, and the person who starts a sole proprietorship is an entrepreneur.

It involves one person owning and running a business.

The sole proprietor starts a business in which he/she is an export and wants to sell his or her skills.

Advantages:

1. Eas of start up:

-You only need to buy or leases the needed equipments, and put an announcement saying you are in business.

-Also it is as easy to go out of business as you start it, you simply stop  there is no one to consult or to disagree with about such decisions.

1. You get to be your own boss.

You make all the decisions and receive the benefits of those decisions.

1. Entrepreneurs are proud of their work.

Many of them work alone, they get to take all the credit ( and risks ) for providing goods and services to customers.

1. Keeping or retaining all the profit to them sellers.
2. Profits are only taxed once only as personal income of the owner.

Disadvantages:

1. Sometimes it is difficult to save enough money to start a business and keep it going . (especially the first 2-4 years).
2. Many entrepreneurs have limited financial resources.

It can be difficult to gather funds because there are limitations on how much an individual can borrow from others.

1. The sole proprietor can not poses all the skills needed to run a business. They have skill gaps that effect their ability to manage the business.  so either he/she must train them or find good people to manage those parts of business where they lack strength which will not be easy because not many people want to work for sole proprietor as salary is less and no chance for advancement.
2. Main disadvantage is having unlimited liability: which means there is no distinction between business and the owner from the financial aspect.

So if the business fails, the owner would be personally responsible for any of the debts you may have incurred in the business.

1. Entrepreneurs have to work many hours.
2. Entrepreneurs lack fringe benefits which are normally receives when working for someone else eg.

-Paying for own sick leave.

-Health insurance.

-Unpaid vacation time.

Which all effect the profit the sole proprietor make.

1. Limited life spans:

Which means if the owner dies or retires, the business no longer exists. ( unless sold or taken over by heirs).

Some proprietors prefer to operate a small manageable business because they realize if they try to do too much for too many customers can make them less effective.

Others wish to expand and become bigger, but might face problems in the financing, so they might consider other forms of ownership such as the partnership or corporations.

II-Partnership:

It is a legal form of business with two or more owners.

There are several types of partnerships:

1. General partnership :

All owners share business and financial obligations ( liabilities ) of the business  all have unlimited liabilities.

1. Limited partnership:

It’s a partnership with one or more general partner and one or more limited partner.

-General partner: its an owner or partner who have unlimited liabilities and is active in managing the firm.

Every partnership must have at least one general partner.

-Limited partner: it’s an owner or partner who invests money in the business, but does not have any management responsibility or liability or losses beyond the investment.

-Limited liability: means that limited partners are not responsible for the depts. Of the business, beyond the amount of their investment, i.e their personal assets are not at risk.

1. Master limited partnership (MLP):

-It’s a new form of partnership.

-It looks much like a corporation  in that it acts like a corporation and is traded on the stock exchange like a corporation  but it is taxed like a partnership  so avoids corporate income tax.

1. Limited liabilities partnership (LLP):

-It is also new type of partnership, formed to avoid liability between professionals ( e.g doctors, dentists, lawyers, engineers ).

-LLP limits partners, risk of losing their personal assets to only their own acts and omission, and to the acts and omissions of people under their supervision.

Partnership should have an agreement that might include things such as:

-How partners must behave with one another.

-How ownership, profits, losses, are shared.

-Who have the right to participate in managing the operations of the business.

Agreements could be written by the partners themselves and a lawyer is not a must, but it’s highly recommended to consult a lawyer when writing a partnership agreement.

Writing the agreement is also not a must.

Advantages:

1. There are ,ore financial resources when two or more individuals can contribute to the business.
2. Pooled knowledge: every partner might be good in something so they could complement each others to make the business proposer.

Disadvantages:

1. Division of profit: profit is divided among the partners, unlike the sole proprietor.
2. Unlimited liability:

-Unlimited liability of the general partner makes him/her liable for the debts Of the firm, no matter who was responsible for causing those debts  so general partners can lose their personal possessions if the co. goes bank rupt.

1. Conflict among the partners:

-E.g how and where to spend money, how the business must be managed.

-That is why is very important to unit all the details in the agreement. i.e. to have a written agreement not an oral one.

1. Terminating a partnership could be very difficult:

-Even if all partners want to terminate the business, who gets what and how assets are divided can be challenging.

1. Corporation:
2. Corporation are not necessary to be large  many corporations are small and by their numbers contribute substantially to the economy.

Corporate governance:

-It’s a written form of how the business will be run.

-It refers to the process , customers, policies, laws, institution  effecting the way in which a corporation is directed, administrated or controlled.

-Every time somebody decides to form a corporation, they will put a set of corporate governance guidelines in place.

-Part of the corporate governance, especially in large businesses is the board of directors.

Board of directors:

-Is the group ultimately responsible for the business.

-Many of them however do not actually work for the business, they are an outside source to provide guidance in the business.

• Corporations could either be public or privately owned 

Public: means it issues shares and there share are traded on the stock exchange market.

Private: means it’s owned by private people ( such as family members) and ownership is traded between them only.

Conventional corporation: is a government – chartered legal entity with the authority to act and have liability separate from its owners ( stockholders are the owners )

i.e. the owners are not liable for the debts or any other problems of the corporation beyond the money they invested.

• Individuals can incorporate  i.e. a corporation does not necessarily have to be a business with many employees and lots of assets.

Advantages :

1. They have the ability to get more money for investments and for growth through either:

-Loans from banks.

-Or by issuing and selling more stock.

1. Easier to draw talented employees because they can offer higher salaries and/or profit.
2. Major advantage is that corporations have limited liabilities.

Corporations are entities in and of themselves, separate from the owners.

Disadvantages:

1. Very complicated to form  a lot of paperwork that must be hand led in order to form a corporation.

They need lawyers when forming which cost a lot of money.

• The internet, however has made incorporation much easier and less expensive. People can now incorporate online at a fraction of the cost it used to require.

1. Double taxation:

The owners of the corporation are taxed twice.

First  the corporation income is taxed as the company is viewed as a separate entity.

Second  the owners’ income is also taxed ( i.e. their dividends )

1. Conflict often occurs between stockholders and the board of directors.

Types of companies:

• C- corporation:

-Conventional (C) corporation: is a state – chartered legal entity with the authority to act and have liability separate from its owners.

• S- corporation:

-Created by the u.s. government and is taxed like a sole proprietorship and partnership.

- There are some restrictions on which business qualify to be an s- corporation such as:

1. Have no more than 100 shareholders.
2. Have shareholders who are individuals or estates and are citizens or permanent residents of the u.s.
3. Have only one class of stock.
4. Have no more than 25% of income derived from passive sources ( e.g. rent or interest )

• Limited liability companies (LLCs).

-Similar to the S- corporation, but without the special restrictions.

-Ownership rules are flexible, also the distribution of profits and losses.

-They can not sell stocks (i.e. they are private)

• Distribute and discuss with students the Bahrain chamber of commerce handout about types of companies in Bahrain.

Franchises and cooperative:

If someone don’t like to open a business from scratch or from zero ( afraid of the risk). He/she could:

-Start a franchise.

-Buy an existing business.

-Start a cooperative.

I-Franchise:

-It is an attractive way to entre the global business.

-Franchise is different from a chain store.

A chain store: is a business that has central management ( i.e. all stores are run by the same people ) and shares a brand name.

Franchise : share a brand name, but does not have central management, the owner of each franchise store is responsible for his/her own business.

Sometimes a chain owns some store but also franchise others. E.g. McDonalds.

In this case, the stores a chain owns are called company store.

A franchise is not a legal form of business, but rather a type of business. The person who purchases a franchise will still have to determine his legal form of business (i.e. sole proprietorship, partnership or corporation).

Advantages:

1. Marketing and management assistance: the franchise has more greater chance of succeeding because his/her has an established product.

The franchiser help the franchises choose a location and promotion, and help in all phrases of operations. (like having a full time consulted)

-The franchiser also give intensive training to the franchises.

-The franchiser also help the franchisee with marketing efforts.

-The franchiser also could offer financial assistance (e.g. loans)

1. Franchises make up a network with fellow franchises who face similar problems and could share experiences.
2. You can still enjoy the benefits of being a sole proprietor, if you so choose . (its your store, you get all the profit) you are still your own boss ( even though you must follow more rules, regulations, and procedures than you would with your own privately owned store.
3. Lower failure rate because of the support provided by the franchisor, and because there are already established customers who trust the product.

Disadvantages:

1. Has a large start-up costs.
2. Franchises must share the profit; the franchisor may demand either large share of the profits, in addition to the start-up fees, or a percentage commission.
3. Management assistance : might become a disadvantage as it is an advantage. Because franchisors have an image to up hold, so they practice very tight restriction on things such as what can be sold, and even pricing which allows little flexibility for the franchisee.
4. Bad reputation of one franchise might effect all the other same franchises.
5. Problem of cannibalization of existing business: which means taking customers that might have gone to one franchisee but end up going to a different one because of location.
6. Difficulty of selling the franchise: there are restrictions on whom you can sell to, to control the quality, the franchisor is insist on approving the new owner.

II- Buying an existing business:

-It can be done through either: a business broker. Or want ads

on the internet on the news papers.

-The advantage is that there is already a customer base,

inventory, and physical structure and location.

-The buyer can review sale numbers to determine if the business

will be profitable enough.

-The original owner is willing sometimes to stay a while and train

the new owner.

-Very important point: is to determine the cost of the business

versus the return (profit) you expect to make on the business.

III- Cooperatives:

Some people dislike having owners, managers, workers, and buyers as separate individuals with separate goals  so they form a cooperative : which is owned and controlled by the people who use it ( producers, customers, or workers ) who have similar needs, who pool their resources for mutual gain e.g. electricity- farms – childcare – housing – food – financial services .. etc.

Some co-ops ask members to work at the cooperative for a number of hours per month as part of their duties.

Members democratically control these business by electing a board of directors that hires professional management.

These co-ops are formed to give numbers more economic power as a group than they would have as individuals.

They don’t pay tax as corporations, so they have an advantage in this.

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